Foreign patient load dipped.

Foreign patient load declined again in 2QFY19 due to a weakening rupiah and potential influence from the upcoming Indonesian elections. This affected the foreign-local mix which dipped to 20:80 (2QFY18: 23:77).

Total bed occupancy increased to 63% in 2QFY19 (2QFY18: 55%).

Plus Medical acquisition a good strategic move.

To recap, HMI recently acquired a stake in Plus Medical Holdings, a clinic group which operates 16 primary care clinics in Singapore. The clinic group is in its initial stages of growth and is poised to increase its network. The initial outlay of S$4.2m (S$3m used in growth capital) will give HMI a 28% stakeholding. Subject to fulfilment of conditions, the group will increase its stake to 60% with the subscription of additional shares in up to four tranches of S$3m each, up to Dec 22.

HMI also has options in place to increase its stake to a full ownership beyond 2022. By developing the network of clinics, the group’s outreach in Singapore deepens and supports the ramp-up of the StarMed Specialist Centre.

Gradually building up StarMed…

For 2QFY19, revenue contribution from StarMed was still negligible. The group is continuing its efforts in marketing and awareness events as well as continuous recruitment of specialists. The centre currently has 2 resident specialists with a network of 30 doctors.

…but group earnings remained hampered by start-up costs.

According to management, excluding the impact of gestation costs for StarMed, 2QFY19 core net profit should have increased 15.5% y-o-y. This suggests an impact of about RM2.9m in the quarter. The centre is also expected to incur additional renovation costs from recent property purchases.

Update on Regency.

Construction of the Regency Hospital’s new extension block has begun, and is expected to break ground by mid-19. Current operations are unaffected with targeted commissioning still scheduled for 2021, expanding Regency’s capacity to 380 beds.

EARNINGS REVISION/RISK

Slight reduction in earnings forecasts.

We factor in marginal associate contributions from Plus Medical’s acquisition as well as slightly higher costs for StarMed. We increase our assumption on EBIT losses for StarMed to RM7m-9m in its first three years of operation.

Overall, we trim our FY19-21 net profit forecasts by up to 1.2%.

VALUATION/RECOMMENDATION

Maintain BUY with a lower DCF-based target price of S$0.73.

While near-term earnings growth is likely to be uninspiring as new expansionary plans take time to ramp up, HMI’s strategic focus to develop outpatient care through its ambulatory specialist centre and clinics in Singapore is a long-term positive.

Our target price is based on the following factors:

2019-23F free cash flow forecast;

revised terminal growth of 2.4%, taking into account the group’s increased presence in Singapore (previously 2.5%, in line with Malaysia’s 10-year long-term inflation rate); and

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